The Organisation of the Petroleum Exporting Countries (OPEC) and its allies have decided two times to cut the production in order to keep the prices high and stable. However, OPECis failing to meet their output targets. In March, the group’s leaders and Russia agreed to extend output cutbacks by 2.2 million barrels per day (b/d), or 2% of world supply, to the end of June, in addition to the previously agreed-upon cuts of 3.7 million b/d for 2024. However, the cartel is currently overproducing to the point where its daily output in 2024 will be virtually unchanged from the fourth quarter of 2023. This may cause problems when members convene to decide their approach at OPEC’s ministerial meeting on June 2nd.
For most of the last two years, the alliance has generated less than its quotas allow. That changed in January, when the most recent cuts were introduced. Since then, the cartel and its partners have consistently exceeded their monthly targets. In April, the excess approached half a million b/d, a level previously seen three years before. As a result, global oil stocks have continued to rise, despite projections to the opposite.
OPEC and its allies have two sorts of cuts in place: mandatory reductions imposed on all members via quotas, and voluntary cutbacks declared by a subset of major producers, notably Saudi Arabia, Russia, and the United Arab Emirates. The difficulty is that individual producers have a motive to cheat by selling above their quotas and taking advantage of others’ efforts to keep prices high in order to boost their own profitability. Actually, according to game theory and Nash equilibria, the players have a strong incentive to deviate and produce more, while others are creating the price boost. Jorge León of Rystad Energy, a consultant, found that some countries are misbehaving on a large scale. Last month, voluntary cutters generated 806,000 more barrels per day than their collective targets required.
The worst offenders, Iraq and Kazakhstan, have regularly broken promises. Russia, which is becoming less obedient, appears to enjoy the effect of announcing cuts but dislikes selling less, maybe because it has to fund its war effort. Some estimates indicate that even Saudi Arabia, the cartel’s de facto leader and traditional enforcer, has been somewhat overproducing. These countries must hope that producers like Azerbaijan, Nigeria, and Sudan continue to pump below their targets because of corruption, underinvestment, and war.
Source: Economist
